Business Credit Terms

Your business credit terms affect the operating cash flow of your business. Many new businesses factor in their business start up costs yet don't give any thought to whether they will offer credit to their clients and if so how this will affect their operating cash flow.

This article on Business Credit Terms has been kindly provided by Paul Reynolds, Director of National Business Services Pty Ltd.

Getting paid on time!

by Paul Reynolds

A credit facility can make it easier for your customers to do business with you, spend more money with you, and provide a mechanism for you to gather valuable marketing information about them if your privacy agreement allows you to do so.

Unfortunately, offering credit carries with it the inherent risk of not being paid, a risk that some businesses are not willing to take, but with a little diligence and effort, the risk can be substantially reduced.

Business Credit Terms

Terms and Conditions of Trade

They should not only allow you to add interest, penalties, and collection costs to overdue accounts, but also give you a legal leg to stand on in the event of disputes arising during the course of doing business.

These can vary enormously depending upon your type of business.

Four common scenarios

1. You supply wholesale goods and your customer places an order.

Goods are scheduled for delivery on the 10th of the month but there has been a delay caused by your courier company and as a result, the goods are delivered on the 11th. Customer refuses to pay as goods were one day late.

Possible remedy:
Your terms of trade should have adequate provisions for delivery delays.

While performing the services, your client requests that you do additional work which is outside the scope of the original agreement. You comply, not wanting to risk upsetting your client.

When it comes time to pay the invoice, the client refuses to pay for the additional work you have performed.

Possible remedy:
Provide provisions for additional work requested in your terms if it is applicable.

Possible remedy:
There should be appropriate provisions to deal with unforeseen circumstances in your terms.

Six months has now passed and in a last ditch effort, you visit the client’s premises and corner them regarding you invoice. You receive the explanation that the goods or services were not what the client wanted and they are refusing to pay.

Possible remedy:
Include a time limit for the notification of defects in your terms.

Writing your terms and conditions

Often this is a result of using terms of trade they have copied from other businesses and slightly modified to suit their own needs. Unique areas of risk will have been missed.

A good exercise when putting your terms and conditions together is to take the time to sit down and briefly list the reasons you have had trouble being paid in the past. These could come under broad categories such as late delivery, extra work required etc.

Next, think of possible areas of your business where there is a risk of not being paid, in other words, get out the crystal ball. Once complete, you will have a good list of areas that need to be covered, which will be your starting point.

Of course going through all this will be a wasted exercise if you do not disclose your terms and conditions to your new and existing customers appropriately, and have them signed as proof of acceptance.

Terms and conditions that are presented on the back of an invoice which is sent after goods are supplied or services rendered may not be enforceable.

In most circumstances, it is preferable to have your customer fill out a credit application form or quotation form which captures all the relevant data about your prospective new customer, including their correct legal name, and ABN / ACN number.

Include a disclaimer

I hereby certify that I have read or sought legal advice and fully understand the general terms and conditions of trade of (your customer name) ABN (your customer ABN), trading as (if applicable), and agree to be bound by these conditions. I further declare that the above information is true and correct, that I am the authorised representative of the Organisation named above, and that I have the authority to agree to these terms on behalf of the Organisation.

Signed: Date:

Full Name: Position:

Further Information

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